Improving the business environment in the Philippines
A case study of GTZ’s support for a better business environment for small and
medium-sized enterprises in the Philippines
Presented at the International Conference on Reforming the Business Environment;
From Assessing Problems to Measuring Results
Cairo 29 November to 1 December 2005
Presenters:
Martina Vahlhaus
Programme Manager of the Small and Medium Enterprise Development for
Sustainable Employment Programme, Gesellschaft für Technische Zusammenarbeit
(GTZ), Manila
Federico M. Macaranas
Executive Director, Policy Centre, Asian Institute of Management, Manila
Prepared by Simon White, Consultant
2005
Gesellschaft für Technische Zusammenarbeit (GTZ)
Eschborn, Germany
SMEDSEP contact details
Small and Medium Enterprise Development for Sustainable Employment Program
Ms. Martina Vahlhaus, Program Manager
Postal address: SMEDSEP Project
C/-GTZ-Office Manila, P.O. Box 2218 MCPO
Makati City, Philippines
Telephone: +63 2 8938297, 8405035, Fax: +63 2 817-9095
Email: smedsep@mozcom.com
Improving the business environment in the Philippines
Abstract
The Small and Medium Enterprise Development for Sustainable Employment Program
(SMEDSEP) is a development cooperation project of the Philippines and German
Governments. It falls under the German development cooperation sector entitled, Economic
Reform and Development of the Market System. The purpose of SMEDSEP is to shape the
business environment in the Philippines, and particularly in the Visayas Region, to enhance
the development and use of entrepreneurial potential and stimulates competition.
This case study has been prepared for the International Conference on Reforming the
Business Environment; From Assessing Problems to Measuring Results held in Cairo 29
November to 1 December 2005. Its purpose is to help other donor agencies, development
organizations and governments to learn from the experiences of designing a program of this
kind. Since SMEDSEP began in late-2003, this case study does not focus on the results or
impact of the program. Instead, it is the process undertaken to assess the need for business
environment reform program and the processes that led to the design of the program that are
of interest.
The design of a donor-support business environment reform program can involve a range of
assessment tools and processes, as well as a high degree of consultation with key
stakeholders. The development of SMEDSEP illustrates how donor agencies can build on
their previous experiences in a host country and elsewhere, draw from the findings of
assessments undertaken by other donor and development agencies, and build collaborative
partnerships with key local actors. Even in the early stages of implementation, SMEDSEP has
shown a commitment to collecting good information that can guide the program in its reform
efforts.
SMEDSEP contains four components, only one of which deals with reforming the business
environment. The other three components, while not described in detail in this case study,
complement the business environment component. These components are financial services,
business development services, and skills development (specifically vocational training).
Another noteworthy feature of SMEDSEP is its dual focus on national and local business
environments. Building on previous experience in German development cooperation in the
Philippines and the networks already developed in the Visayas Region, SMEDSEP has
designed interventions that endeavour to improve the business environment at the national
level, while working with local government units and other local and regional actors to testout approaches that lead to local business environments that are more conducive to small
enterprise development.
SMEDSEP (GTZ) case study
2
Improving the business environment in the Philippines
Table of contents
1
2
3
4
5
Introduction ..............................................................................................................4
1.1
Committee of Donor Agencies for Small Enterprise Development.............4
1.2
Micro, small and medium-sized enterprises in the Philippines....................5
1.3
Report structure ............................................................................................6
Context for private sector and small enterprise development ..................................7
2.1
National poverty and investment flows........................................................7
2.2
Supporting private sector and small enterprise development.......................8
2.3
National framework conditions for private sector and small
enterprise development...............................................................................12
2.4
Local conditions for private sector and small enterprise
development ...............................................................................................17
Designing SMEDSEP ............................................................................................20
3.1
Chronology of program development ........................................................20
3.2
Lessons learnt in program design...............................................................25
SMEDSEP in action...............................................................................................27
4.1
Structuring the advisory team and action planning ....................................28
4.2
National review of policy and legal framework .........................................28
4.3
Survey of business regulatory processes in selected Visayan cities ..........29
4.4
Production of tools for practitioners and policy-makers ............................29
4.5
Component 1 strategy development ...........................................................30
SMEDSEP guiding principles and areas of focus..................................................32
5.1
6
Addressing reform challenges ....................................................................34
Conclusions and lessons to learn............................................................................37
References ................................................................................................................................40
Annex 1:
City competitiveness indicators .............................................................................42
Annex 2:
Philippine development partner organizations.......................................................46
Annex 3:
Partner organizations in German development cooperation ..................................47
Annex 4:
Other donor support for private sector and small enterprise development ............49
SMEDSEP (GTZ) case study
3
Improving the business environment in the Philippines
1
Introduction
This case study has been prepared as a contribution by the Gesellschaft für Technische
Zusammenarbeit (GTZ) to the Committee of Donor Agencies for Small Enterprise
Development. The Small and Medium Enterprise Development for Sustainable Employment
Program (SMEDSEP) is a development cooperation project of the Philippines and German
Governments. It falls under the German development cooperation sector entitled, Economic
Reform and Development of the Market System. The purpose of SMEDSEP is to shape the
business environment in the Philippines, and particularly in the Visayas Region, in a way that
enables the development and use of entrepreneurial potential and stimulates competition.
This case study has been prepared so that other donor agencies, development organizations
and governments can learn from the experiences of designing a program of this kind. Since
SMEDSEP began in late-2003, this case study does not focus on the results or impact of the
program. Instead, it is the process that was undertaken to assess the need for business
environment reform program and the processes that lead to the design of the program that are
of interest.
1.1
Committee of Donor Agencies for Small Enterprise Development
Since its inception in 2001, the Working Group on Enabling Environment has sought to draw
together information on how donor agencies are supporting reforms in the business
environment for small enterprise development. The interest in working together on this
subject stems from three reasons: (1) because it is important to know what each agency is
doing and to learn from each other's experiences; (2) because coordination and collaboration
at the country level can improve the effectiveness of donor interventions; and (3) because
cooperation among agencies is likely to give a better mix of knowledge, experience and
partners at country level.
A first initiative of the Working Group was to commission research into the role donor
agencies play in promoting an enabling environment in five countries/regions.1 This resulted
in the publication of a report entitled, Enabling small enterprise development through a better
business environment (White & Chacaltana 2002). The findings of this report were presented
during the annual meeting of the Committee of Donor Agencies in Turin in September 2002.
The report identified similarities and differences in donor initiatives in this field, while
describing the content, process and outcomes of donor efforts.
In 2004, the Working Group commissioned further research to better understand the concepts,
approaches and practices donor agencies apply in their efforts to improve the business
environment in which small enterprises operate.
1
The five countries/regions examined were the Balkans (encompassing Albania, BosniaHerzegovina and FYR Macedonia), the Caribbean (specifically Dominica, Grenada, Guyana,
and Jamaica), Peru, Tanzania, and Viet Nam.
SMEDSEP (GTZ) case study
4
Improving the business environment in the Philippines
The report entitled Donor approaches to improving the business environment for small
enterprises (White 2004a) was presented at the Committee of Donor Agencies annual
meeting in Columbia in September 2004.
Stemming from the outcomes of this research, the Working Group on Enabling Environment
has encouraged its members to prepare and disseminate case studies into how donor agencies
support reform of the business environment. Case studies on donor-supported reform
interventions can provide useful descriptive and analytical information on the concepts,
approaches, tools and practices donor agencies use when supporting the development of a
more enabling business environment for small enterprises. Case studies can be used for
comparative purposes or to examine the processes involved in designing, implementing or
evaluating a specific business environment program.
This case study has been prepared as a contribution to the Committee’s work on donorsupported business environment reform. It describes the processes used by GTZ to establish a
business environment reform program in the Philippines.
1.2
Micro, small and medium-sized enterprises in the Philippines
The Philippines Government regards micro, small and medium-sized enterprises (MSMEs) as
the driving force behind economic and social development increasingly. However, there are
significant structural and institutional problems that hamper the potential of MSMEs to
develop and to contribute to the social and economic goals of the country. Thus, while, on the
one hand, there are government agencies eager to support the development of MSMEs––and
even the president herself has boosted the priority of this cause––on the other hand, there are
government-induced obstacles to private sector and (in particular) small enterprise
development that need to be addressed.
The following table
Philippines.
(Table 1) provides the most recent definition for MSMEs in the
SMEDSEP (GTZ) case study
5
Improving the business environment in the Philippines
Table 1: Micro, small and medium-sized enterprises defined
Enterprise category
Total asset value
Nº of employees
Micro-enterprise
P3,000,000 or less
1–9
Small enterprise
P3,000,000 – P15,000,000
10 – 99
P15,000,000 – P100,000,000
100 – 199
Medium enterprise
SOURCE: SMED Council Resolution, January 2003
The Philippines Department of Trade and Industry (DTI) claims that MSMEs account for
99.6 per cent of the country’s businesses (some 811,589 firms), generating 69.1 per cent of
Total Employment and 32 per cent of Value Added (Government of the Philippines 2004,
Chapter 2).
1.3
Report structure
This case study is organised as follows. The next chapter describes the context in which
SMEDSEP was developed according to three key themes: (1) the demand for donor support,
which is focussed on the high levels of poverty and low investment experienced in the
Philippines over the last ten years; (2) the role of the private sector, and small enterprises in
particular, in addressing the development challenges experienced in the Philippines, with a
focus on recent government initiatives; (3) the national framework conditions for small
enterprise development and the outcomes of recent assessments of the investment climate and
business environment;2 and (4) the local conditions for small enterprise development.
Chapter 3 then presents a chronological account of the development of SMEDSEP. This
illustrates the range of assessments and consultations undertaken to launch the program to the
point of implementation. Some of the main lessons learnt in designing a business
environment reform program of this sort are also described.
Chapter 4 describes the work of SMEDSEP since its launch, with attention given to the
program component dealing with the business environment for small enterprises. Chapter 5
identifies the principles and challenges illustrated in SMEDSEP’s work, while Chapter 6
presents conclusions and lessons that can be drawn from the SMEDSEP experience to-date.
2
The term ‘investment climate’ is used in this paper to describe the broader macroeconomic
policies and institutions affecting private sector development, while the term ‘business
environment’ refers to the policies, laws, regulations and institutions that have a more direct
affect on the performance of privately owned enterprises, especially micro, small and medium
enterprises.
SMEDSEP (GTZ) case study
6
Improving the business environment in the Philippines
2
Context for private sector and small enterprise development
The economic and social character of the Philippines set the conditions for the design of
SMEDSEP. While high levels of poverty and low levels of investment create the overall
demand for development cooperation, the potential of the private sector and, in particular, the
presence of a large MSME sector provide a point of focus for donor intervention.
2.1
National poverty and investment flows
The incidence of poverty in the Philippines, or the proportion of households below the
poverty line, fell from about 40 per cent in 1991 to 32 per cent in 1997 when growth was
relatively rapid. However, the Asian Development Bank and World Bank (2004) describe
how poverty rose again to 34 per cent in 2000 as growth turned slightly negative as a
consequence of the Asian Financial Crisis.
About 5.1 million households were considered poor in 2000. The majority of the poor are in
rural areas where infrastructure is inadequate, productivity low, and non-farm employment
opportunities lacking. Seventy three per cent of the country’s poor reside in rural areas.
Both domestic and foreign investment in the Philippines has fluctuated over the last ten years.
Domestic investment, measured as gross domestic investment (GDI), averaged 23.6 per cent
of GDP from 1993 to 1996. Thereafter, investment growth was dampened due to the
economic slowdown. In 2001, GDI expanded by 13.6 per cent from the previous-year’s level
despite the unsteady political and economic environment, but in 2002 GDI recorded a
negative growth relative to GDP, down to just a little over 19 per cent.
Foreign investment during 1986-1989 showed relatively large inflows, spurred by
liberalization and deregulation measures. However, the growth recession of the next two
years saw net foreign direct investment (FDI) reduce dramatically. However, FDI inflows
improved as the economy improved, accounting for about 2.2 per cent of GDP from 1993 to
1996. However, by 2002 net FDI was down to 1.4 per cent of GDP (Asian Development
Bank & World Bank 2004).
The drop in both domestic and foreign investment has mostly been blamed on the
‘deteriorating investment climate in the Philippines’ (Alburo, Lamberte et al. 2003). While
the economic policies of the Philippines were radically reformed in the 1990s leading to a
relatively stable macro-economy, growing fiscal deficits have weakened the economy. In
addition, Alburo, Lamberte et al. (2003) claim ‘vested interests appear to increasingly
influence both legislative and judicial proceedings and the weakness of the public sector in
creating and enforcing freely competitive and/or regulated markets act as a deterrent to
prospective investors and a drag on economic growth. While private enterprises do dominate
the economy, effective competition does not exist in many sectors’.
A strong history of pro-business policies, economic liberalisation and relatively skilled
workforce has contributed to a large private sector. Around 99.6 per cent of all firms in the
Philippines are MSMEs, of which the majority are micro enterprises. MSMEs employ around
SMEDSEP (GTZ) case study
7
Improving the business environment in the Philippines
69.1 per cent of the workforce and account for about 32 per cent of the national value chain
(Government of the Philippines 2004, Chapter 2).
2.2
Supporting private sector and small enterprise development
For a long time, the Philippines Government has established and maintained a policy
framework that could be broadly defined as ‘pro-business’. However, it has been large
enterprises and particularly foreign-owned firms located in the Philippines have captured
much of the government’s attention in the past. Micro-enterprises have received some
attention from Government, but mainly as mechanism to help the poor become engaged in
creating their own livelihoods.
SMEs and their specific concerns have recently gained some prominence in the Philippines
through policies such as the following:
Magna Carta for Small Enterprises of 1997
The Magna Carta for Small Enterprises (RA6977; RA8289) was passed in January 1991 and
amended in May 1997. It provides a definition of small enterprises and establishes a range of
government support services for the development of small enterprises in the Philippines.
To address the financing needs of SMEs, the Magna Carta created the Small Business
Guarantee and Finance Corporation (SBGFC) to ‘provide, promote, develop and widen in
both scope and service reach various alternative modes of financing for small enterprises…’
The Corporation guarantees loans obtained by qualified small enterprises.
Amendments to the Magna Carta for Small Enterprises are currently under consideration by
the Congress of the Philippines to broaden its focus to include micro-enterprises. In addition,
House Bill No. 180 of the 13th Congress of the Philippines entitled, An Act To Further
Promote Entrepreneurship And Support The Development Of Micro, Small And Medium
Enterprises, Amending For The Purpose Of Republic Act No. 6977, As Amended, Otherwise
Known As The Magna Carta For Small Enterprises, endeavours to provide greater resources
and institutional support for micro-enterprise development.
Small and Medium Enterprise Development Council
The Magna Carta also created the Small and Medium Enterprise Development (SMED)
Council, whose mandate is to promote, the growth and development of SMEs by ‘facilitating
and closely coordinating national efforts to promote the viability and growth of SMEs,
including assisting relevant agencies in the tapping of local and foreign funds… as well as
promoting the use of existing guarantee programs’. The SMED Council is attached to the
Department of Trade and Industry (DTI), which serves as its secretariat.
SMEDSEP (GTZ) case study
8
Improving the business environment in the Philippines
Barangay Micro Business Enterprises Act of 2002
The Barangay Micro Business Enterprises Act (or BMBE Act) encourages micro-enterprises
to formally register. The main incentive for registration is and exemption from taxes and
minimum wage laws. The Act is ‘a policy of the State to hasten the country’s economic
development by encouraging the formation and growth of barangay micro business
enterprises’ and the integration of ‘those in the informal sector with the mainstream
economy’. This is to be achieved through the rationalization of bureaucratic restrictions, the
active intervention of the government––at the local level in particular––and the granting of
incentives and benefits.
Thus, a new category of enterprises was created by this Act: the BMBE. A BMBE refers to
‘any business entity or enterprise engaged in the production, processing or manufacturing of
products or commodities, including agro-processing, trading and services.’ DTI issued a
Department Administrative Order (No. 01) indicating that a BMBE ‘shall include any
individual owning such business entity/enterprise, partnership, cooperative, corporation,
association or other entity incorporated and/or organized and existing under Philippine laws;
and registered with the office of the treasurer of a city or municipality in accordance with
these (sic) implementing rules and regulations’. However, the BMBE must also have an asset
size of not more than three million pesos, excluding land, before applying for BMBE
registration.
This definition allows micro-enterprises that have previously registered under the Magna
Carta to register again with the DTI as a BMBE (Tecson 2004). There are many benefits and
incentives provided for by the BMBE Act, such as:
•
Exemption from income tax arising from the operation of the enterprise
•
Reduction or exemption from all local taxes, fees and charges
•
Speedy registration and processing of licenses and permits through one-stop business
registration centres which local government units are encouraged to establish
•
Exemption from the Coverage of the Minimum Wage Law provided ‘that all
employees under the Act are entitled to the same benefits given to any regular
employee such as social security and healthcare benefits’
•
Access to credit, though the opening of special credit window to service the financing
needs of BMBEs by government banks and other public financial institutions––special
guarantee windows will also be opened to guarantee BMBE loans
•
Technology transfer, production and management training, marketing assistance will
be provided by specific government agencies
•
Trade and Investment promotion, assuming these are provided by private sector
organizations and NGOs
SMEDSEP (GTZ) case study
9
Improving the business environment in the Philippines
SME Development Plan 2004–2010
This Government Plan calls for broad-based support to foster competitiveness and growth of
SME. The plan presents the integrated efforts of government to strengthen and stimulate the
SME sector (which in this case includes micro-enterprises) so that it can contribute more
effectively to the country’s development. By 2010, the plan aims to make the SME sector a
key factor in the country’s economic growth by 2010.
The plan contains the following vision of SME development in the Philippines:
The overall vision of the SME Plan 2004-2010 is to create globally competitive SMEs
in the new industrial economic environment. These are SMEs that acquired distinctive
competencies from harnessing efficient technologies and establishing strategic
relationships with partners, market forces, suppliers (even competitor producers). The
envisioned breed of dynamic SMEs shall propel the nation into the world-class
business sphere. These SMEs shall also showcase the country as a people, its richness
in resources, as well as the boundless possibilities available to create and offer
products and services to seamless global markets.
The SMEs shall be a sector of excellently managed and globally competitive entities
served through the pool of professionally managed and efficiently run partner
organizations with superb capabilities to adopt new knowledge and technologies that
will develop high value-added products.
The Plan is designed to be carried out in three stages: (1) roll-out; (2) assessment of interim
results; and (3) re-programmed implementation. It aims to increase the SME sector’s gross
value added contribution to 40 per cent of aggregate by 2010. It also intends to make the
SME sector a major contributor to export growth, with exporting SMEs achieving a 16 per
cent annual growth rate in export sales. These are expected to come about mainly through the
creation of ‘globally competitive SMEs’ and assistance in aggressively seeking new market
and product opportunities.
In order to meet the issues and challenges of the SME sector, the plan sets down the
following strategies:
To enhance operations of the individual SME
1
Provide SMEs access to comprehensive and focused support for enhancing managerial
and technological capabilities, tapping business opportunities, and becoming
competitive in the local and international markets.
2
Provide support for identifying and developing business opportunities through the
development of business ideas that promote the expansion and diversification of the
country’s industrial structure.
To assist priority industries
3
Strengthen support to the growth industries that are active in the international markets
in order to sustain and enhance their competitiveness and improve their access to the
domestic market.
SMEDSEP (GTZ) case study
10
Improving the business environment in the Philippines
4
Provide support for industrial linkages of SMEs with leading Philippine industries to
strengthen the country’s industrial structure.
To improve the SME operational environment
5
Develop SME financing support programs and strengthen the institutions that provide
direct and appropriate financial services to SMEs.
6
Streamline the systems that provide support programs and incentives for SMEs.
7
Streamline the implementation of SME policies and regulations.
8
Strengthen and build the capabilities of institutions that generate and implement
programs for SME development.
Forty-eight specific programs are described in the plan and are used to pursue the
implementation of the above eight strategies.
GMA Development Agenda
In addition to the above, the newly elected president Gloria Macapagal Arroyo (GMA)
announced her administration would seek to create one million new jobs a year by supporting
entrepreneurs: ‘To create a higher economic growth path, we will need to bring investments
from 19 per cent of GDP to 28 per cent of GDP, and increase our exports of goods and
services from $38 billion to $50 billion within two years. To achieve these objectives,
government will provide the policy environment that will reduce the costs and risks of doing
business and nurture globally competitive enterprises that will produce goods of high quality
in a cost-efficient manner. It will also provide the marketing and logistical support to
facilitate domestic and international trade and effect transfer of knowledge that will increase
the productivity of our people’ (GMA Development Agenda, July 2004).
DTI Roadmap
DTI has formulated a Long-Term Plan to Institutionalise SME Development (2004-2010). Its
goals are to ‘increase the contribution of SMEs as a primary engine of growth’ and ‘spur the
Philippine SMEs to be at par or better than the performance level of comparable ASEAN
enterprises in terms of value added, employment, number of establishments, and export
volume’. There are two strategies contained in this document that specifically address ‘broadbased strategies’ for SME development: Strategy 6: ‘Strengthen the systems that provide
support programs and incentives for SMEs’ and Strategy 7: ‘Streamline the implementation
of SME policies and regulations’.
The DTI has also developed a major campaign known as the One Town One ProductPhilippines (OTOP-Philippines) Program.3 This is a priority program of President Gloria
3
The OTOP program is based on Japan’s One Village One Product (OVOP) project, OTOP has
already been established in Thailand, Vietnam, Malawi, Cambodia, Pakistan, India,
SMEDSEP (GTZ) case study
11
Improving the business environment in the Philippines
Macapagal-Arroyo to promote entrepreneurship and create jobs, which encourages MSMEs
to produce and market distinct products or services using indigenous raw materials and
manpower. Through OTOP-Philippines, local chief executives of every city and municipality
take the lead in identifying, developing, and promoting a specific product or service, which
has a competitive advantage. LGUs are also encouraged to create and provide a conducive
business environment and prioritise OTOP-Philippines programs and activities in their area.4
2.3
National framework conditions for private sector and small enterprise
development
The policy, legal and regulatory framework presents great problems to enterprises of all sizes.
While the Government of the Philippines has pronounced its commitment to improving this,
there are significant challenges to address. The following examples serve to illustrate these
challenges.
The World Bank’s Doing Business in 2005 report presents a number of indicators concerning
the regulatory burden on business. See Table 2, below. This provides some useful regional
and international comparisons. It shows that the Philippines has a number of improvements to
make if it is to compare more favourably with its neighbours and more developed countries.
Bangladesh, and Indonesia as an effective tool of poverty alleviation particularly in the rural
areas.
4
The DTI, through its Regional Operations Group and SME Development Group, assists the
LGUs in identifying the specific product or service and coordinates all forms of assistance
from various agencies including the Departments of Agriculture (DA), Environment and
Natural Resources (DENR), Interior and Local Government (DILG), Science and Technology
(DOST), Tourism (DOT) and the Technical Education Skills Development Authority
(TESDA). Under the program, the inter-agencies will provide MSMEs a comprehensive
package of assistance including business counselling; skills and entrepreneurial training;
product design and development; marketing; and introduction of appropriate technologies.
SMEDSEP (GTZ) case study
12
Improving the business environment in the Philippines
Table 2: Snapshot of Doing Business in 2005, Philippines
Indicator
Philippines
East Asia and
Pacific Regional
Average
OECD Average
Number of procedures to start a business
11
8
6
Time to start a business (days)
50
52
25
19.5
47.1
8.0
Difficulty of Hiring Index
22
20.6
26.2
Rigidity of Hours Index
60
30.0
50.0
Difficulty of Firing Index
40
22.7
26.8
Rigidity of Employment Index
41
24.2
34.4
Firing costs (weeks of wages)
90
53.0
40.4
8
4
4
Time (days)
33
51
34
Cost (% of property per capita)
5.7
4.3
4.9
8.3
1.9
5.2
Legal Rights Index
5
5.4
6.3
Credit Information Index
2
2.0
5.0
Public credit registry coverage (borrowers/1000 adults)
0
33.9
76.2
34
67.3
577.2
6
2.6
5.6
Starting a business (2004)
Cost to start a business (% of income per capita)
Hiring and firing workers (2004)
Registering property (2004)
Number of procedures
Getting credit
Cost to create collateral (% of income per capita)
Private bureau coverage (borrowers/1000 adults)
Protecting investors (2004)
Disclosure Index
SMEDSEP (GTZ) case study
13
Improving the business environment in the Philippines
Enforcing contracts (2004)
Number of procedures
25
27
19
Time (days)
380
316
229
Cost (% of debt)
50.7
57.0
10.8
Time (years)
5.6
3.6
1.7
Cost (% of estate)
38
29.8
6.8
Recovery rate (cents on the dollar)
3.9
30.4
72.1
Closing a business (2004)
Source: World Bank (2004)
The informal economy represented some 43.4 per cent of the economy in the Philippines in
2003 (World Bank 2004). It is likely that many MSMEs are found in this sector of the
economy. Thus, the procedures and costs described in the Doing Business in 2005 report are
not necessarily directly experienced by this group. Indeed, in many cases, informal
enterprises will remain informal because of the negative consequences perceived in
formalising. To this end, the following table is of interest.
Table 3 below, presents data from the World Bank Investment Survey conducted in 2003. It
is interesting to note that roughly a quarter of all surveyed enterprises consider the
Government of the Philippines as a major obstacle in the areas presented. Corruption,
economic and regulatory uncertainty, and inefficient delivery of government services are the
most pronounced government failures in the business sector’s dealings with the authorities.
Thus, it is not just the procedures an enterprise has to deal with that hamper business
activities in the Philippines (as presented in the Doing Business in 2005 report), but the way
these transactions are administered.
SMEDSEP (GTZ) case study
14
Improving the business environment in the Philippines
Table 3: Government as a business obstacle
Major Obstacles
or Very Severe
Obstacle
Inefficient Or
Very Inefficient
Fully Disagree
Or Disagree in
Most Cases
Government obstacle
Tax administration
25.14%
Customs and trade regulations
21.66%
Labour regulations
24.71%
Licensing and operating permits
13.52%
Economic and regulatory uncertainty
29.50%
Corruption
35.17%
Anti competitiveness/ informal practices
24.27%
Efficiency of govt. in delivering services
Officials’ interpretations of laws consistent
and predictable
33.97%
24.93%
Source: World Bank (2003)
The Asian Development Bank and World Bank (2004) found that deficiencies in
infrastructure and weak governance affect small enterprises adversely. Small enterprises have
to contend with longer delays, compared to large firms, in getting delivery from imports and
clearing customs (Asian Development Bank & World Bank 2004, p. 48). However, it should
be noted that the sample of small firms used contained a relatively high number of
employees, i.e., 10-99 workers (footnote 3). Thus, the experiences of enterprises with less
than ten workers have not been captured.5
The Asian Development Bank and World Bank (2004) suggest that improvements to the
investment climate could be made in the following areas:
•
Infrastructure needs to be improved: especially in the delivery of electricity, water,
and roads and maritime transport
5
It should also be noted that 62 percent of the firms sampled in the Investment Climate Survey
were owned by males and 60 per cent of the samples were located within or very close to city
centres (World Bank 2003).
SMEDSEP (GTZ) case study
15
Improving the business environment in the Philippines
•
Regulatory procedures need to be reduced: especially in customs and trade
regulations, labour legislation, taxation, as well as the more general fields of
governance and corruption
•
Access to finance needs to be
increased: efforts should be made to
facilitate better access to finance for
businesses from commercial banks,
especially for small enterprises
Gross (2004b) has identified three reasons for
tackling policies, laws and regulations to
improve the business environment for MSMEs
in the Philippines:
1
The share of the informal economy in
the Philippines is the second largest in
the region, which may at least in part be
due to an unfriendly business
environment
Micro-enterprise views on the problems of
registering
Length of processing time for registration:
The
documentary
requirements
for
registration are voluminous and require time
to gather. Moreover, processing takes days if
not weeks.
Cost of registration: Fees are high for a
micro-enterprise and it may be preferable to
put this money into working capital. The
required documents are also rather costly:
health certificates, x-rays and stool
examinations of workers, etc.
Lack of information: on what permits to get,
where to get them and how much they really
cost. Some participants were afraid of
‘hidden’ requirements that they would be
asked to comply with.
2
There is a wide discrepancy between
actual and available best practice
government-private sector interaction
3
The implementation of laws and Source: Tecson (2004)
regulation
is
plagued
with
inefficiencies, corruption and unnecessary costs to businesses
A study into the private sector in the Philippines commissioned by the Asian Development
Bank proposed the follow areas for ADB support (Alburo, Lamberte et al. 2003):
1
Creating a rules-based business environment. It was recommended that this include
the strengthening of the legal framework for competition; efforts to eradicate
corruption; strengthening the legal framework and enforcement mechanisms for
protecting credit and property rights; and reducing political interference in the
markets.
2
Attracting private sector investment into physical infrastructure through coherent
investment planning and implementation; credible and independent regulatory
oversight; the establishment of clear rules and regulations for the solicitation and
evaluation of PPI proposals; tariff regimes based on cost recovery; and efficient
mechanisms for dispute resolution.
3
Mobilizing finance for private sector development through legal, regulatory, and
corporate governance reforms.
4
Facilitating the growth and development of micro-enterprises and SMEs. Here the
consultants noted: ‘it should be remembered that in the Philippines, as in most middle-
SMEDSEP (GTZ) case study
16
Improving the business environment in the Philippines
income countries, the engines of job creation in the economy are micro and SMEs.
Facilitating the creation and growth of these enterprises, particularly in rural areas
most affected by poverty, must remain a development priority’.
5
Local implementation approaches: ‘While engagement with the national Government
on policy, legal and regulatory issues is and will remain essential in addressing private
sector development issues’ said the consultants, ‘working with local governments may
present greater opportunities for focused governance reform. Local governments have
responsibility for managing a large number of public services which directly affect the
operating conditions of private enterprises, most notably the provision of
infrastructure (water, power, roads, ports, airports)’.
2.4
Local conditions for private sector and small enterprise development
Increasingly, attention is being given to the importance of the local business environment. It
is at the local level that most MSMEs come into direct contact with government bureaucracy.
Local institutions and procedures can become another layer of bureaucratic burden, or they
can facilitate and support MSMEs as they navigate the regulatory framework.
The Philippines Government has introduced an aggressive decentralisation program focussed
on the local government unit (LGU). Increasingly, attention has been given to LGUs and the
role they can play in promoting local social and economic development. The BMBE Act, for
example, stipulates that LGUs ‘are encouraged to reduce the amount of local taxes, fees and
charges imposed or to exempt the BMBEs from local taxes, fees and charges’. It also
suggests that LGUs will provide one-stop business registration centres that will offer speedy
registration and processing of licenses and permits.
The Asian Institute of Management (AIM) Policy Center (2003) conducted an assessment of
fifty cities in the Philippines to determine their competitiveness as well as the attractiveness
of their local economic and political systems. This was to encourage local government leaders
to better understand that with decentralization, ‘their roles must shift from being mere service
providers to becoming economic and development managers’ (p. 1).
Based on the understanding that competitiveness refers to the ability and the extent to which a
city is able to provide an environment that nurtures the progress and dynamism of its local
enterprises and industries, the assessment endeavours to investigate the following 'drivers of
competitiveness':
•
Cost competitiveness: How expensive is it to operate a business in the city compared
to other cities? This driver is concerned with the direct costs of doing business, such
as those for land, labour, rent, telecommunications and power.
•
Human resources and training: How well equipped is the population to build and take
advantage of opportunities in the locality? The education of the populace is taken to
be the most significant component of human resource endowment. The driver
primarily refers to the competence of local labour and the availability of training
programs for skills development.
SMEDSEP (GTZ) case study
17
Improving the business environment in the Philippines
•
Infrastructure: Are the necessary physical, telecommunications, technological,
infrastructure and knowledge support services in place in the city? Transacting
business requires not only production factors, but also accompanying infrastructure
and services. These include, among others, road infrastructure, information and
communications technology, and transport.
•
Linkages and accessibility: Linkages are one of the significant determinants of city
competitiveness. This refers to proximity to other growth nodes, urban centres, and
surrounding growth regions. The driver's aspects are accessibility to domestic and
international markets and the availability of national government and business support
services. Moreover, certain geographical characteristics can be advantages upon
which a city can build.
•
Quality of life: How well off are residents in terms of quality of environment and life?
The quality of life factor has been increasingly considered as one of the yardsticks in
determining which cities have successfully developed and which have succumbed to
the ills of urbanization. Indeed, the long-term competitiveness of the city would
significantly be influenced by the degree to which its leaders have taken care of the
environment and the local community. Among the relevant aspects of the quality of
life are the social welfare of the people, peace and order, quality of living
environment, and local amenities.
These competitiveness drivers lay the foundations for the attractiveness of a city as a place to
live and do business. The competitiveness of a city is also greatly influenced by good
governance and the involvement of the private sector. Thus, the assessment focuses on the
conditions required for a vibrant local economy that attracts inward investments, as well as on
the responsiveness of the LGU.
Annex 1 contains a list of qualitative and quantitative indicators used to assess metropolitan
cities (i.e., Metro Manila, Metro Cebu and Metro Davao), mid-sized cities (those nonmetropolitan cities with more than 200,000 residents), and small cities (cities with less then
200,000 residents).
The AIM Policy Center identified five key features characterising the Philippines’ most
competitive cities (p. 27):
1
The cities that are most competitive belong to the metropolitan cities, which could be
attributed partly to the resources available to the LGUs. Its strengths lie in its
accessibility and linkages and the presence of good infrastructure.
2
Most of the cities considered very competitive have a strong supporting environment
(i.e., a responsive local government with business-friendly policies and regulations
and support services), examples include Dagupan’s on-line transaction with City Hall
and Marikina’s streamlined processing of business permits.
3
The most competitive cities have main attractions, core competencies or products or
services as its main source of revenues and employment generation (e.g., tourism
SMEDSEP (GTZ) case study
18
Improving the business environment in the Philippines
sector for Tagaytay, educational institutions in Baguio and Iloilo, and financial
services in Makati).
4
A number of cities are influenced by the strengths of their neighbours or by belonging
to a cluster of relatively strong cities (e.g., Metro Manila, Metro Cebu, Calabarzon).
The factor endowments present in these clusters (i.e., road network, ports, power grid,
quality tertiary educational and vocational/technical institutions) offer nearby cities
opportunities to enhance trade and services and develop its human resources.
5
In addition to low cost of doing business, market is one of the primary reasons for the
mushrooming of SMEs in a given city. The population and the heavy traffic that the
city generates draw businesses such as fast food establishments, which in turn lead to
the setting up of branches of banking institutions.
As will be shown in the following chapter, local business environments have become an
important feature of SMEDSEP.
SMEDSEP (GTZ) case study
19
Improving the business environment in the Philippines
3
Designing SMEDSEP
This chapter describes the processes that led to the design of SMEDSEP and the lessons that
can be learnt from these experiences.
3.1
Chronology of program development
The following presents a chronology of events leading to the design and implementation of
SMEDSEP. The chronology illustrates the level of assessments performed to identify the
general purpose of the program, leading to consultations with key stakeholders and
collaboration with program partners in the design and initiation of the program.
3.1.1
Previous Philippine-German development cooperation
Bilateral relations between Germany and the Philippines have long been warm and friendly.
Germany decided as early as 1961 to make the Philippines one of its major development
partners and the Philippines are among 40 nations in Asia, Africa and Latin America, which
form the ‘core group’ of Germany’s current priority partner countries. Nowadays, Germany is
the third largest bilateral donor of the Philippines after Japan and the USA. Through the
efforts initially facilitated by German church organizations as early as the 1950s, the number
of official development workers in the Philippines has grown to almost one hundred today. In
addition to that number, countless other represent various religious, political and private
institutions with projects all over the Philippine islands (German Embassy Manila 2004).
The focus of the countries’ bilateral relations is in the fields of economics and development
aid. In 1994, Philippines President Ramos visited Germany and in October 1996, the German
Chancellor visited the Philippines. Federal Foreign Minister, Fischer visited Manila in 2000
and the German Minister of State, Muller visited in 2003 (Manila Bulletin Online 2001).
Since the start of the bilateral cooperation in1961, the German Government has committed a
total bilateral assistance of more than EUR 552 million in financial cooperation and EUR
149.5 million in technical cooperation for a broad spectrum of projects and programs. Annex
2 contains a list of Philippine partner organizations that have participated in development
cooperation with the Government of the Federal Republic of Germany.
The last German-Philippine bilateral talks were held in June 2003. In these discussions the
German government pledged EUR 26.5 million for 2003 and 2004 for a number of projects
under the bilateral technical and financial cooperation.
The most important implementing agencies for the bilateral German-Philippine development
cooperation are the GTZ (German technical cooperation), KfW (German development bank),
InWent (Capacity building international), DED (German Development Service) and CIM
(integrated experts). About 20 German NGOs, the churches and political foundations
SMEDSEP (GTZ) case study
20
Improving the business environment in the Philippines
affiliated with major political parties in Germany are also carrying out various development
projects.6 See Annex 3 for more details.
Poverty alleviation is the overarching objective of German development cooperation has been
established by the document entitled, BMZ concept for development cooperation in Asian
countries.
There are four focal areas of Germany’s current development cooperation designed to meet
this objective:
1
Economic reform and the development of the market system (SMEDSEP falls within
this focal area)
2
Health care, family planning, and HIV/AIDS
3
Environmental policies and the protection and sustainable use of natural resources
4
Drinking water, water management, sanitation and waste management
Within the first focal area referred to above, German development cooperation has adopted a
‘systemic approach to competitiveness’. This contains development interventions focussed on
the development of the SME sector at three levels: macro (i.e., legal and administrative
framework conditions), meso (i.e., institutions, associations and chambers, private sector
providers, and networks), and micro (enterprises, employed men and women, young people).
Within this range of possible interventions, Philippines-German discussions agreed that
future development cooperation would concentrate on the framework conditions for
competitiveness and sustainable growth in the development of the SME sector, as well as on
systematic meso level interventions.
Philippines-German discussions also led to the identification of the Visayas Region as a
suitable location for regional concentration of German development cooperation. The Visayas
Region (which covers Regions 6, 7 and 8) is a ‘medium ranked’ region in the national
context, but contains remarkable local disparities. On this basis, it was agreed that
development cooperation in promoting SME competitiveness and sustainability should
involve:
(i)
Project and future program contributions that comply with local demands and with the
objectives of a regional development strategy; interventions should be demandoriented while integrating local development plans into the design of regional and
national development plans in a bottom-up manner.
6
The German Embassy also directly undertakes Small Scale Livelihood Projects in the
Philippines. These projects are financed from the budget of the German Ministry for
Development Cooperation (BMZ) and are intended to directly improve the quality of life of
poor families, especially in rural areas (e.g., remote islands, mountainous areas). Examples of
Small Scale Livelihood Projects include: construction of a suspension bridge in Suyo, Ilocos
Sur; water supply system for vegetable planting in Bagac, Bataan; and multi-purpose
cooperative store in San Dionisio, Iloilo.
SMEDSEP (GTZ) case study
21
Improving the business environment in the Philippines
(ii)
Local initiatives should be back by national policies. Institutions such as DTI and
TESDA should contribute to the development of private sector lead growth by clear
market-oriented schemes.
In summary, the overall structure of German development cooperation in the Philippines in
the field of Economic Reform and Development of the Market System was as follows.
Overall goal:
Contributing to poverty alleviation by increasing
sustainable employment and income (employmentoriented growth).
Specific goal 1:
The competitiveness of the private sector is increased
by contributing to the development of the SME sector,
the financial system, the employability of the labour
force as well as to market-friendly framework
conditions.
Specific goal 2:
Selected regions are strengthened in using their
economic potentials for development.
The Government of the Federation of Germany was acutely aware of the role other donor
agencies were playing in the promotion of the private sector in the Philippines. See Annex 4.
Efforts were taken in all consultations to ensure that the contributions of the Government of
the Federation of Germany complemented and supported these initiatives.
3.1.2
Request for assistance in private sector development (2001)
In 2001, the Philippines Department for Trade and Industry wrote to the Government of the
Federal Republic of Germany requesting technical assistance for private sector development
that would help Philippines’ industries become more globally and locally competitive. The
Government of the Federal Republic of Germany responded by requesting GTZ to field an
appraisal mission to the Philippines.
3.1.3
Appraisal mission (April 2002)
As previous Philippine-German development cooperation dealt with vocational training in the
Visayas Region of the Philippines, it was considered useful to examine how a private sector
development could complement previous experiences in this region in designing the appraisal
mission. The terms of reference for the appraisal mission were reviewed in the first two days
of the mission with the GTZ Country Director and then with National Economic and
Development Authority (NEDA) and the DTI.
The appraisal mission concluded that, indeed, the German Government could support the
Philippines in its efforts to make the private sector more competitive. To this end, the
appraisal team recommended that the program focus on the needs of SMEs. The team
believed that while the SME sector was vital to employment generation and poverty reduction
SMEDSEP (GTZ) case study
22
Improving the business environment in the Philippines
in the Philippines, most government attention was paid to large corporations and microenterprises (Prey, Hartig et al. 2002).
The report prepared by the appraisal team drew from a variety of information collected during
the appraisal mission. This included interviews with key government agencies in Manila as
well as in the Visayas Region. Interviews were also held with current German development
programs and other donor agencies supporting private sector development in the Philippines.
The appraisal team recommended that the program address four fundamental constraints to
SME competitiveness:
1
Business environment for SMEs
2
Business development services
3
Access to financial services
4
Skills and staff development
It was believed that while separate, each of these components would create mutually
beneficial synergies.
Since the Philippines and German governments had previously agreed that their cooperation
should have a regional focus (i.e., in the Visayas Region), the appraisal team recommended
the program contain a national and regional focus.
The inclusion of the Visayas Region in the work of the appraisal team and the inclusion of the
region in the final recommendations of the team is interesting because it shows how such
assessments are often conducted on a subjective basis. The selection of the Visayas was based
on previous engagement in this region and a long-standing agreement with the Government
of the Philippines. It was not selected because of its poor or good business environment or for
the relevance of specific issues facing the MSME sector in the region. This is consistent with
the findings of White (2004a), which suggest that donor agencies do not rely solely on
objective assessments when formulating reform interventions.
3.1.4
The offer
In 2002, following the outcome of the appraisal mission, GTZ (2002) prepared an ‘offer on
the implementation of the Private Sector Development Programme’ in the Philippines, which
committed 5,317,000 euro to the program from September 2003 to August 2006. As a
technical agency, GTZ is required to submit a formal offer (i.e., program proposal) to the
Government of Germany.
This offer laid the foundations for the design and implementation of what was to become
SMEDSEP and established the following overall objective of the program: ‘State-run and
private institutions create general business conditions in the Philippines, particularly in the
Visayas, to harness entrepreneurial potential and encourage competition’.
SMEDSEP (GTZ) case study
23
Improving the business environment in the Philippines
GTZ nominated Department of Trade and Industry (DTI) and the Technical Education and
Skills Development Authority (TESDA) as joint executing agencies. Separate implementation
agreements were later established with both these agencies.
As the following activities show, acceptance of this offer by the Government of the Federal
Republic of Germany does not lead to the immediate launch of the program. Instead, the
overall purpose, timeframe and structure of the program are agreed to. A process whereby
GTZ refine the program strategies in close consultation with relevant domestic actors and
potential program partners follows this.
3.1.5
Planning workshops
A series of planning workshops were held to consult with key program counterparts and to
finalise the design and management of the program:
•
Antipolo City workshop (September 2002): This was a program-planning meeting
in which the need for a multi-partnership arrangement was agreed upon.
•
Bacolod City workshop (October 2003): This workshop was a follow-up to the
Antipolo City workshop in order to define the relationships among key program
players and agree on a process for designing an implementation plan for the program.
Staff from the national, regional and provincial levels of DTI and the Technical
Education and Skills Development Authority (TESDA) attended the meeting, along
with representatives from GTZ. It as at this meeting that the official name of the
program was agreed upon (Small and Medium Enterprise Development for
Sustainable Employment Program, or SMEDSEP). A Steering Committee was also
formed and there was agreement to present a detailed work program to the next
meeting (initially scheduled to be held on Panglao Island, Bohol, in November 2003
(GTZ 2003).
•
Kick-off workshop (December 2003): Sixty six participants attended the ‘Kick-off
workshop’ in December 2003 at Lapulapu City, thirty nine of these were
representatives of the private sector, representing SMEs, as well as various trade
associations and chambers of commerce and industry. Other participants represented
DTI, TESDA, local government and SMEDSEP. The main output of the meeting was
an increased level of awareness among participants and the agencies they represented
of the program’s purpose, its management arrangements, and planned activities
(SMEDSEP 2003). It was also at this workshop that the final decisions were made
regarding LGUs in the pilot provinces (see map on the following page).
SMEDSEP (GTZ) case study
24
Improving the business environment in the Philippines
Map of pilot provinces
Pilot
Provinces
3.2
Lessons learnt in program design
SMEDSEP’s own reflections on the lessons that can be learnt from setting up a business
environment reform program such as this are informative. The following issues have been
identified by SMEDSEP as significant in this regard (adapted from Gross 2004a):
•
Relevance with the national agenda: the design of a reform such as SMEDSEP
should be closely linked to the government’s own reform and development agenda.
This allows the program to be seen as adding value to domestic reform processes,
rather than bringing external agendas.
•
Make use of locally recognised program structures: there are some well regarded
mechanisms for program management and information sharing that, while not
necessarily desired by the donor, are considered appropriate and useful by local actors
(e.g., steering committees). Program design should accommodate the use of
recognised program structures to build program ownership. Care should also be taken
SMEDSEP (GTZ) case study
25
Improving the business environment in the Philippines
to follow the bureaucratic structures and procedures that are in place, regardless of
how time-consuming this may be.
•
Consultation is essential: it helps different actors of the business environment to
express their views and to find a common ground for reform. Priorities will vary
among different actors––especially among public and private sector actors––but
consultation will help to build understanding and ownership.
•
Tensions surrounding the role of government: While good international practice in
setting the framework conditions for private sector and small enterprise development
suggest that government should generally perform a hands-off, facilitator’s role,
national governments have their own interests. Political pressure and institutional selfinterest often encourages government departments to play a direct role, for example in
service delivery. Thus, government agencies want to be seen for doing things that
support private sector and small enterprise development.
•
Build the capacity of local personnel and agencies: SMEDSEP has found it very
useful to develop close working relationships with local agencies, as well as to
employ local staff with a sound knowledge of the Philippines government processes.
This encourages actors to share knowledge and information in the vernacular, while
also helping local actors (i.e., individuals and organizations) to engage these issues
more fully.
In addition to these lessons, it is interesting to note that the basic structure of the program was
quickly established and agreed to by GTZ and the Government of the Federal Republic of
Germany. This rather rapid agreement built on a strong history of development cooperation
between Germany and the Philippines. Understandably, there were some changes of emphasis
and focus that occurred as the program moved from its initial approval toward its launch.
SMEDSEP has recognised the importance of working closely with domestic program
partners. It has invested considerable time and money to ensure that all program partners
understand the program and contribute their own views on how it should work. Thus, there
appears to be a high degree of ownership of this program by the program partners.
SMEDSEP and GTZ have been active partners in efforts to promote donor coordination in the
SME sector. While a many donors are engaged in SME promotion, only a handful of agencies
are engaged in programs that support the policy environment for SME development. In
addition to GTZ, these are the Canadian International Development Agency and the Japan
International Cooperation Agency. See Annex 4 for further details.
An SME Donor Group has been established in the Philippines. Currently chaired by Mr Joe
Goodings of the Canadian International Development Agency, the group liaises closely with
the Government of the Philippines and, in particular, with DTI and the SMED Council. The
Group is currently commissioning a consultant to assist––in close consultation with
government––in the process of defining priorities for the implementation of the SME
Development Plan and to estimate the technical, financial and human resources need to
implement these.
SMEDSEP (GTZ) case study
26
Improving the business environment in the Philippines
4
SMEDSEP in action
What follows is a brief overview of SMEDSEP, illustrating its current focus and activities.
The overall goal for SMEDSEP is as follows:
State and private institutions shape the business environment in the Philippines,
and particularly in the Visayas, in a way that enables the development and use of
entrepreneurial potential and stimulates competition. Focusing on certain pilot
areas is expected to heighten their dynamic capacity, resulting in more income
and employment, especially for poor population segments.
German promotion is scheduled to last for an eight-year period at an estimated cost of 12
million. The first phase is planned to run for three years and is financed with a German
contribution in the amount of 5,317,000.
SMEDSEP’s target group is small and medium enterprises, as well as micro enterprises with
growth potential.
Four different components of program activity are contained within SMEDSEP:
1
Creation of a framework conducive to business activities
Component objective: policy proposals for the improvement of the business climate at
national and local and regional levels exist and have been implemented in the Visayas
on a pilot basis.
2
Market development for MSME-relevant services
Component objective: business development services in selected areas of the Visayas
adequately meet the growing demand from MSMEs
3
Improving access to medium- and long-term loan financing
Component objective: selected banks in the Visayas Region increase the share of
MSMEs in their credit portfolio
4
Improved vocational training and upgrading
Component objective: demand-oriented training is increasingly available for people
capable of work in the Visayas Region
SMEDSEP has designed following indicators for its first program component (Creation of a
framework conducive to business activities) to measure its success:
•
The local investment climate/business environment has improved (in selected LGUs
in the Visayas) compared with other regions in the Philippines (e.g., higher ranking in
the ‘Competitiveness of Cities’ list drawn up by the Asian Institute of Management)
•
Representatives of the SME sector are regularly and effectively integrated into the
decision-making processes by relevant promotion institutions (e.g., frequency of
consultations, results achieved)
SMEDSEP (GTZ) case study
27
Improving the business environment in the Philippines
•
SMEs confirm the approval and licensing procedures have been shortened, simplified
and are better publicised
•
Seventy per cent (70 per cent) of the entrepreneurs say that the framework conditions
have improved since the beginning of the phase (based on a random survey)
This case study is concerned with the contribution SMEDSEP can make to the improvement
of the business environment for small enterprises in the Philippines. Thus, activities and
outcomes of the first program component are of most interest. Since its inception, SMEDSEP
has undertaken the following activities to achieve its first component objective.
4.1
Structuring the advisory team and action planning
A workshop was held in March 2004 with the SMEDSEP advisory team. The aim of this
workshop was to establish a common understanding of the program strategy and to develop a
suitable planning and management structure within the team (Ramm 2004).
4.2
National review of policy and legal framework
SMEDSEP commissioned a consultant to undertake a review of the policies and laws
affecting MSMEs in the Philippines (Tecson 2004). The resulting report included a review of
the literature on the business environment for small enterprises as well as a desktop analysis
of policies, laws and regulations dealing with: starting a business (business registration),
financing, taxes and infrastructure, labour and human resource development, trade, and
technology and competition. Focus group discussions were also conducted in Bacolod,
Negros Occidental and Cebu City (in the Visayas).
This report documented a wide range of policy, legal and regulatory instruments affecting
MSMEs in the Philippines and provided valuable data for the implementation of SMEDSEP.
Among the range of problems and issues identified by this study were the following:
•
High cost of business registration is a result of unnecessary documentary requirements
and long processing times
•
Lack of information on registration procedures
•
Lack of information on available sources of credit
•
Lack of orientation of banks with regard to lending to small businesses, hence still
dependent on collateral-based lending
•
SULONG program, or SME Unified Opportunities for National Growth program,
while promising, has too little budget to meet the demands of SMEs
•
Small Business Guarantee and Finance Corporation (now known as the Small
Business Corporation) is undermined by additional collateral requirements
•
Lack of credit for research and development
•
Complicated procedures surrounding tax payments
SMEDSEP (GTZ) case study
28
Improving the business environment in the Philippines
•
Lack of information on taxes and fees (opportunities for corruption)
•
Non-payment or discouragement to pay proper taxes due to lack of transparency
•
Perception that industrial parks cater to foreign investments rather than local firms
•
Need to rationalise real estate tax
•
Tariffs on agricultural inputs (e.g., sugar) increases the cost of production for
exporters and reduces competitiveness
4.3
Survey of business regulatory processes in selected Visayan cities
SMEDSEP commissioned an assessment of the business registration procedures in six cities
of the Visayas in October 2004 (Aleta, Kropp et al. 2004). These were: Bacolod in Region 6;
Cebu, Lapulapu and Mandaue in Region 7; and Ormoc and Tacloban in Region 8. The report
sought to benchmark the processes involved in registering a business in these cities. This was
done so that local mayors, city treasurers and city administrators in these cities could begin to
assess the impact future reforms may have on making the process of business registration
easier. This is in line with the policy directions established by the Barangay Micro Business
Act of 2002 (as described above). Thus, this survey created substantial evidence of the issues
faced by MSMEs in urban areas of the Visayas.
Among the findings of this survey were the following notable issues:
•
All LGUs experienced difficulties in meeting the requirements of national policies and
laws associated with the Social Security System, PhilHealth, and Pag-Ibig.7
•
Most LGUs did not used computerised systems for business registration and record
keeping.
•
Most LGU personnel involved in registering or assessing businesses had received
little training in how to effectively undertake these activities.
•
Business registration is a complicated procedure in all cities and can be streamlined.
In addition, this report also presented a number of options to SMEDSEP regarding it support
for reform of the business environment in these cities.
4.4
Production of tools for practitioners and policy-makers
In October 2004, a SMEDSEP consultant produced Tools for analysing the political, legal
and regulatory environment for SME (Gross 2004b). These tools were based on the
7
Pag-Ibig is a trust fund to which all employees in the Philippines contribute each month.
Employees, in return, can obtain housing loans from this fund. The employers deduct from
their employees’ salaries a small amount to be remitted to Pag-ibig. As a prerequisite for the
renewal of business permits, the LGUs also look for proofs if companies actually make their
payments to Pagibig.
SMEDSEP (GTZ) case study
29
Improving the business environment in the Philippines
experiences of SMEDSEP to date, but also drew from international sources and experiences.
The main target audience of the tools are practitioners working with donor agencies in the
field, who are concerned with actual implementation questions or in headquarters, where the
focus is on planning, monitoring and concept development.
The tools were designed to extend beyond a narrow SME perspective to include such topics
as local and regional development, decentralization, good (regulatory) governance and
administrative reform. The document contains a range of tools that can be used to undertake
an assessment of the business environment for MSMEs.
4.5
Component 1 strategy development
Drawing from the information collected in the abovementioned activities, SMEDSEP
undertook a process of strategy development for the business environment component of the
program. This involved a workshop with key actors (DTI, TESDA, and private sector
representatives) in Manila in October 2004, along with the commissioning of an options
paper by an international consultant.
During this workshop a number of possible areas of focus for SMEDSEP Component 1 were
discussed and presented. These included (White 2004b):
•
Redefining the role of MSME development in the Philippines policy framework
•
Strengthening public-private dialogue
•
Strengthening analysis and the design of reform programs
•
Building a demand for reform
•
Simplifying business registration and reporting regimes
•
Improving the policy and legal framework for MSE employment
The workshop identified a number of critical issues that affect the business environment for
MSMEs, which SMEDSEP should bear in mind, and provided recommendations on possible
activities, linkages and outcomes.
Aside from the issues identified in the various presentations that were made, participants
indicated it would be important to establish a communication system to inform MSMEs of
existing programs that support them, as well as to do something to address the current lack of
advocacy on entrepreneurship.
The registration of micro enterprises and business permit processing came out as the most
critical area to be addressed by SMEDSEP. The specific activities to address this issue can
be undertaken on several levels, as the chart below shows.
Specific Issue
Activities
Possible Partners
Lack of Communication
(Information on
Creation of SME centres
capable of IT-based
SMED Council, PCCI,
SMEDSEP (GTZ) case study
Possible Outcomes by
2006
Government for financial
30
Improving the business environment in the Philippines
available assistance for
MSMEs)
High Cost of Doing
Business for MSMEs
Lack of LGU capability
to support MSME
business registration
information
dissemination and
complaint/feedback
monitoring
LGUs
support
Academe
Creation of counterpart
monitoring entities in the
private sector
Private Sector
Implementation of
advocacy campaigns to
increase awareness and
interest on
entrepreneurship
DTI, DOLE, TESDA,
DOF
Simplification of
business registration
process and reporting
patterns
NGAs involved in
business registrations
Development of
databases in LGUs
DILG/LGU Leagues
More business identified
DTI
Improved coordination and
policy development
Increase awareness of
BMBE law
Training of LGU
personnel on BMBE and
other MSME-related
laws
Convergence of other
government programs
SMEDSEP (GTZ) case study
Media
Government
LGUs
Private sector (NGOs,
people’s organizations,
civil society groups)
Donors
Other donor agencies
(PIA, DOF, GFIs)
LGUs will become more
developmentally inclined
Increased focus on
managerial capability
building
Business registration
process and flow are
simple, clear and efficient
More MSMEs are
registered
More people are aware of
BMBE law
LGU personnel are capable
of implementing businessfriendly environment
31
Improving the business environment in the Philippines
5
SMEDSEP guiding principles and areas of focus
SMEDSEP has identified the following principles that underlie its efforts to improve the
business environment for small enterprises (adapted from Gross 2004b):
•
Take a comprehensive approach towards improving the business environment: laws
and regulations at national and local levels will be studied simultaneously in order to
promote policy coherence.
•
Focus on the local level: to improve the responsiveness of local authorities to business
needs and to improve rules and regulations and their implementation.
•
Process orientation: ongoing evaluation and fine-tuning will improve impact. Rather
than rolling out a pre-determined plan, constant adjustment towards ‘do-able’ reform
provides the intervention with the necessary flexibility to address problems as they
emerge.
•
Identification of the energy for change: to add-value to existing reform initiatives
rather than promoting theoretically desirable interventions. Thus, one criterion in the
selection of possible interventions is the degree of commitment whether directly
observable or perceived.
•
Introduction and promotion of competition: this should be done at the municipal level
by presenting the bi-annual city competitiveness survey of the Asian Institute of
Management. At the national level, regional benchmarking is encouraged by using
data from the World Bank’s doing business database.
SMEDSEP will apply the above principles when identifying and responding to the main
priorities for reform of the business environment for MSMEs. Indeed, there are many areas of
focus that the program can choose and in the early stages of the program’s development it has
been important to identify specific entry points.
One of these entry points, or areas of focus, has been the BMBE Act (2002). This act was
specifically designed to support the development of the micro-enterprise sector through the
provision of a number of exemptions. However, its implementation has been poor and there
are many areas where SMEDSEP can contribute to both a review of the BMBE Act to assess
its impact on the micro enterprise sector and support at the local level for better
implementation.
The Department of Finance as well as the Department of Labor and Employment have
successfully resisted the implementation of the BMBE Act by issuing Implementation Rules
that undermine the purpose of the act. The Department of Finance does not want to decrease
Government revenue by exempting micro-enterprises from their taxation obligations, while
the Department of Labor and Employment fear the affects this might have on stifling
employment growth in the MSME sector and forcing more enterprises into the informal
economy. This is an unresolved issue and underlying conflict that has never been openly
debated. Thus, Component 1 SMEDSEP is in a good position to add-value to this debate
SMEDSEP (GTZ) case study
32
Improving the business environment in the Philippines
through the presentation of reform options for government and improving the understanding
within government concerning the impact of laws and regulations on the MSME sector.
LGUs are an obvious area of focus for SMEDSEP. Improving the local conditions for
MSMEs requires the direct involvement of the LGUs. Indeed, LGUs have been given more
and more powers in recent years are government has pursued a strong decentralisation
program. The establishment of local business centres is a government initiative SMEDSEP
can both support and use.
Another possible entry point, or area of focus, for SMEDSEP is on issues of current concern.
Because the MSME sector creates many jobs, increasing attention has been given to the
quantity and quality of MSME employment. Organizations such as the Philippines Chamber
of Commerce and Industry and the Employers’ Confederation of the Philippines have
proposed a reduction of the minimum wage and the deregulation of the labour market, while
others have been concerned for the quality of employment in the MSME sector. While this is
a large and controversial field, SMEDSEP is well placed to promote further discussion on this
issue and to present options for reform. These options could be piloted at the local level––in
the Visayas––with experiences being communicated to national tripartite partners.
As SMEDSEP has developed its areas of focus have been refined. One example of this is
found in the program’s target group. When GTZ first conceptualised the program it proposed
a focus on SMEs. However, as consultations and further assessments were undertaken,
SMEDSEP broadened this target to include micro-enterprises ‘with the potential for growth’.
Thus, the target group is now MSMEs.
In the consultations and assessments that led to the establishment of SMEDSEP, it has
become clear that supporting reforms in the business environment for MSME development
often involves working with different partners and not only with MSMEs with or without
potential. In many cases, SMEDSEP’s Component 1 has less direct involvement with the
MSME sector than other components of the program. Some of the most relevant actors that
should be involved in Component 1 are listed below:
•
The legislature:
–
•
Congressional and Senate Trade and Industry Committees
National government:
–
Department for Trade and Industry (DTI), Bureau for Small and Medium
Enterprise Development
–
Small and Medium Enterprise Development Council (national and provincial)
–
Department for the Interior and Local Government
–
Other relevant national departments (e.g., Department for Science and
Technology, Department for Tourism, Department for Finance)
–
National Economic Development Authority
–
Technical Education and Skills Development Authority (TESDA)
SMEDSEP (GTZ) case study
33
Improving the business environment in the Philippines
–
Philippines Special Economic Zones Authority
•
Regional and provincial government offices
•
Private sector representatives:
–
Philippines Chamber of Commerce and Industry
–
Employers Confederation of the Philippines
–
Various sector associations (e.g., tourism, IT)
–
Foreign chambers (e.g., European Chamber of Commerce, American Chamber
of Commerce)
•
Media
•
Commercial banks
•
Technical support agencies:
•
–
Asia Institute of Management (AIM)
–
University of the Philippines (including the Institute for Small-Scale Industries
and the Small Enterprises Research and Development Foundation, Inc.)
–
Training agencies (e.g., Local Government Academy)
Donor agencies:
–
Asia Foundation
–
Asia Development Bank
–
International Labour Organization
–
World Bank
Thus, if SMEDSEP is to be effective, it is required to work with a wide range of actors:
public, private and civic.
5.1
Addressing reform challenges
There are a number of challenges in the business environment that SMEDSEP must address if
it is to effectively achieve its desired outcomes. These are described below within three
broadly framed challenge areas:
•
Challenge of national policy
•
Challenge of local business environments
•
Challenge of engaging the private sector
SMEDSEP (GTZ) case study
34
Improving the business environment in the Philippines
5.1.1
Challenge of national policy
The Government’s national policy arena for MSME development sets the framework within
which most other challenges are faced. It is here that issues such as the role of government
and the role of the private sector are clarified, as are issues such as the importance and
influence of the investment climate and business environment, the role of regulation, the
relevance of private sector development and competition, etc.
Government has increasingly highlighted the importance of the MSME sector and announced
a number of policy and program measures to promote the growth and competitiveness of the
sector. However, turning these good intentions into meaningful change is a major challenge.
There appear to be three issues to address when facing this challenge.
Firstly, promotion of the MSME sector requires the coordinated efforts of a number of
national agencies. The Philippines Government lacks a unified stand on a number of issues
concerning MSME development. Each government office appears to be pushing its own goals
and demands, which in some cases are contradictory. The BMBE Act is a good example. This
is a relatively new act that has been poorly implemented. One of the main reasons for this is
the lack of coordination across all government ministries, some of which are openly opposed
to the act (e.g., Department of Finance). To address this challenge, SMEDSEP works with a
number of government departments to facilitate dialogue toward a more common
understanding of the role that government can play in MSME development. However, there
are many policy and program initiatives of government, which SMEDSEP could support and
the challenge for SMEDSEP is to decide which ones it can best support.
Secondly, the Philippines Government does not show a strong interest in major reform. While
there is a general understanding of the need to improve certain areas (e.g., to simplify
business registration procedures), there are few signs of a strong commitment to making the
business environment better for MSMEs. This is partly due to the lack of a strong demand
from the private sector for change. Many people in business are used to doing business in the
current environment and the lack of strong business associations, especially within the
MSME sector, tend to encourage the status quo. SMEDSEP works with government agencies
to help them introduce the reforms the government wishes to make, nonetheless it also works
with other groups in the Philippines to encourage debate on these matters.
Thirdly, government needs to see how MSMEs can contribute to social and economic goals
and to understand its role in MSME promotion. SMEDSEP assists in this process by
promoting a vision for MSME development. Part of this vision building should be to
highlight the relevance of MSMEs in broader private sector development. Currently, firms in
the MSME category are seen either as a poverty-stricken group of enterprises that need
constant handouts (especially financial handouts) or as major employers that deserve special
support. The likely truth is that MSMEs contain both kinds of enterprises and many more.
The diversity of this very large sector should not be underestimated. Thus, SMEDSEP plans
to promote concepts and models that display the link between firm size and the business
environment. It will highlight those elements of the business environment that keep small
firms small, while helping policy-makers to recognise that the achievement of national
development goals (as well as the Millennium Development Goals) through enterprise
SMEDSEP (GTZ) case study
35
Improving the business environment in the Philippines
development requires a specific role for government in concert with other actors in the
business environment.
5.1.2
Challenge of local business environments
The strong decentralisation thrust of the Philippines has given local government units (LGUs)
greater powers in the registration of businesses, but here again, there has been mixed success
in achieving reform in this field. SMEDSEP is well placed to work with selected LGUs in the
Visayas to help in the simplification of business registration procedures. LGUs now have
greater responsibilities with regard to business registration and a whole range of other
functions concerning MSME development. SMEDSEP will help selected LGUs in the
Visayas design and deliver programs that reform the local business environment and promote
the strategic development of the local business sector. This would include helping LGUs to
initiate and sustain dialogue with the local private sector, including the local micro enterprise
sector.
5.1.3
Challenge of engaging the private sector
Government policy-makers appear to have very little contact with MSMEs. While the
Philippines Chamber of Commerce and Industry and the Employers Confederation of the
Philippines often claim to have many small business members, the extent to which the views
of micro and small enterprises are sufficiently represented can be questioned.
Thus, the third major challenge is to engage the private sector. From the start, SMEDSEP has
sought to involve the private sector in all its consultations and studies. However, in many
cases MSMEs are poorly organized, especially at the local level, which has meant that
MSME participation has often relied on the direct participation of specific firms.
SMEDSEP plans to support the development of local business forums as a mechanism for
promoting regular and meaningful dialogue between local MSMEs and LGUs.
SMEDSEP (GTZ) case study
36
Improving the business environment in the Philippines
6
Conclusions and lessons to learn
This chapter attempts to draw some conclusions and lessons from the experiences of
designing a reform program such as SMEDSEP. While it is not possible to identify the impact
of the program at this stage––since the program is still in its early (start-up) stage––there
appear to be a number of interesting features to recognise. Indeed, a close monitoring of the
SMEDSEP program over the coming years could provide very useful information for further
analysis and discussion.
Using existing assessments and analysis
GTZ made good use of the assessments and analysis of other agencies when designing
SMEDSEP. Rather than undertake its own assessments and surveys, GTZ drew what it could
from the work of the Asian Development Bank, the Asian Institute of Management, the
Government of the Philippines and the World Bank––in addition to other academic studies
and reports.
Digging deeper as the program is refined
Once agreements had been reached regarding the overall scope and direction of SMEDSEP,
the program undertook a number of focussed assessments that allowed it to dig deeper into
the issues that affected the business environment for MSMEs. This included a national
assessment of the policies, laws and regulations that apply to MSMEs, as well as an
assessment of the local conditions in the Visayas.
Continuing consultations
The early stages of SMEDSEP is characterised by a high degree of consultation with
government agencies, as well as with the private sector. While two government agencies were
assigned program partners, consultation with other agencies has been sought. Private sector
consultations have included formal representative agencies, as well as opportunities for
MSMEs to participate in forums and studies.
Working with other donors
SMEDSEP has been developed in close consultation with the donor community in the
Philippines. The program is an active member of the SME Donor Group, which liaises
closely with the Government of the Philippines and, in particular, with DTI and the SMED
Council.
Refining program focus
SMEDSEP has gradually refined its area of focus, target groups and program activities as it
has developed. While the program remains faithful to the original objectives set by GTZ
SMEDSEP (GTZ) case study
37
Improving the business environment in the Philippines
when it was approved, it has been able to adapt and respond to new information and the
demands and opportunities that became apparent through extensive consultation and further
investigation.
Working with a wide range of actors
SMEDSEP has formed strong relationships with two national partners: DTI and TESDA.
These agencies are well placed to take on issues associated with the national policy
framework for MSME development. However, there are a number of other agencies that need
to be brought into the reform process (e.g., Congressional and Senate Trade and Industry
Committees, Small and Medium Enterprise Development Council––at national and provincial
levels, Department for the Interior and Local Government, Department of Finance, the
Philippines Special Economic Zones Authority, Philippines Chamber of Commerce and
Industry, Employers Confederation of the Philippines, selected LGUs, and the media).
Applying national and local reform dimensions
SMEDSEP’s approach to reform at national and local levels is significant. This approach
allows the program to test the impact of national changes at the local level, while also
enabling it to pilot new approaches in selected LGUs. There is a sound rationale for this
approach, which is informed by the strong decentralisation program of the Philippines
Government and the work on the competitiveness of cities undertaken by the Asian Institute
of Management. Local program efforts also build on the previous experiences, networks and
relationships GTZ has in the Visayas.
Applying complementary services
This case study has focussed on one component of SMEDSEP, the component dealing with
reforms to the business environment for MSMEs. However, there are three other components
that make up the program and complement its reform activities. The information and
experiences gained in the other components are very useful for reform purposes and the
program manager is eager to ensure these are shared across all components.
Supporting current reform efforts
SMEDSEP is clearly focussed on supporting and strengthening current reform efforts.
International experience (including GTZ experience) has shown that donor agencies wishing
to improve the business environment cannot take the lead in these processes. The key lead
agencies are domestic agencies: government mainly, but also the private sector. Thus,
SMEDSEP works with these agencies to support their reform efforts.
SMEDSEP (GTZ) case study
38
Improving the business environment in the Philippines
Building a demand for reform
There will be occasions where SMEDSEP identifies reforms that government haven’t seen or
believe are less relevant. In such cases SMEDSEP will continue its dialogue with domestic
partners on these issues, including the private sector. A demand for reform must be created to
influence the national policy agenda. This requires a long-term commitment to establish
stable alliances with relevant stakeholders.
Focussing on the achievable
SMEDSEP appears to focus on those reforms that are possible within its financial and time
constraints. There are many elements of the business environment that require reform.
However, SMEDSEP has not attempted to address all these. Instead, the program focuses on
those elements of the business environment that it can support. While very important, it
would appear that SMEDSEP cannot contribute much to reforms in governance, commercial
dispute resolution, corruption in general, customs, infrastructure and utilities, and competition
policy and law.
Keeping a long-term perspective
While SMEDSEP is focussing on what is achievable within the bounds of its timeframe and
resources, it also appears to focus on long-term results. It is easy, for example, to focus on the
simplification of business registration procedures and to lose track of broader business
environment issues. Thus, SMEDSEP promotes discussion on the purpose of the business
environment reform and the benefit of private sector development in general and MSME
development in particular.
Positioning small enterprise development within a larger context
While the promotion of MSMEs is a central concern for SMEDSEP, it is the broader business
environment that the program wishes to improve. The experiences of MSMEs provide a lens
through which the broader business environment can be viewed. Thus, the experiences of
MSMEs in the business environment are a kind of litmus test that shows the effect the
investment climate has on the private sector. SMEDSEP’s work with this target group
complements the work of other agencies (e.g., World Bank, Asian Development Bank) that
are more concerned with larger, formal firms (e.g., through investment climate surveys and
assessments). Thus, SMEDSEP provides a sharper focus on specific issues by highlighting
the investment climate constraints that affect MSME development.
Engaging the private sector
SMEDSEP is eager to work with the private sector in its support for business environment
reforms. It has ensured that private sector representatives are invited to all workshops and has
endeavoured to capture the concerns of this sector in all studies and assessments.
SMEDSEP (GTZ) case study
39
Improving the business environment in the Philippines
References
AIM Policy Center (2003) Pinoy cities on the rise. A competitiveness ranking of fifty cities in
the Philippines Manila, Asian Institute of Management
Alburo, F., M. Lamberte and E. Patalinghug (2003) Private sector assessment study.
Consultants' report Manila, Asian Development Bank
Aleta, C., M. Kropp and M. J. Roxas (2004) A survey of business regulatory processes in
selected Visayan cities. Draft report Manila, SMEDSEP
Asian Development Bank (2005) Country Assistance Plans - Philippines, Asian Development
Bank. 2005. http://www.adb.org/Documents/CAPs/PHI/0306.asp
Asian Development Bank and World Bank (2004) Improving the investment climate in the
Philippines. Economic and Research Department Report Manila, Asian Development
Bank, Philippines Country Office
German Embassy Manila (2004) Development cooperation, German Embassy Manila, Press
and Public Affairs Section. 2004.
http://www.manila.diplo.de/en/05/Wirtschaftliche__Zusammenarbeit/Development__
cooperation.html
Government of the Philippines (2004) DTI three-year roadmap (2005-2007). Getting our acts
together Manila, Department of Trade and Industry
Gross, C. (2004a) Report on how to set up an enabling environment component. SMEDSEP
presentation Manila, SMEDSEP
Gross, C. (2004b) Tools for analysing the political, legal and regulatory environment for
SME; based on the experiences of the Small and Medium Enterprise Development for
Sustainable Employment Program (SMEDSEP), Philippines during its first year of
implementation. Manila, GTZ SMEDSEP.
GTZ (2002) Offer on the implementation of the project: Private Sector Development
Programme, Philippines. Eschborn, GTZ.
GTZ (2003) Shaping up to start; workshop outputs and agreements, Program-planning
workshop. Bacolod City, 2-3 October, GTZ
Manila Bulletin Online (2001) 14th Anniversary of German Unification, The Manila Bulletin
Online. 2004. http://www.mb.com.ph/OPED2004100319751.html
Prey, J., P. Hartig, P. Rana, U. Gaetner and U. Toernoss (2002) Summary report. Findings of
the appraisal mission, 15th-29th April, 2002 Eschborn, Private Sector Development
Program, GTZ
Ramm, G. (2004) Workshop report. Report on workshop from 2-3 March 2004 with the
SMEDSEP Advisory Team Hamburg, SMEDSEP
SMEDSEP (2003) Narrative summary, Kick-off Workshop. Plantation Bay Resort,
Marigondon, Lapulapu City, Philippines, 3-5 December,
SMEDSEP (GTZ) case study
40
Improving the business environment in the Philippines
Tecson, G. (2004) Review of existing policies and laws affecting MSMEs in the Philippines.
Draft report Manila, SMEDSEP
White, S. (2004a) Donor approaches to improving the business environment for small
enterprises. Donor approaches to improving the business environment for small
enterprises Washington, Committee of Donors for Small Enterprise Development,
Working Group on Enabling Environment
White, S. (2004b) National and local reforms toward a better investment climates for micro,
small and medium enterprises in the Philippines; option paper. Consultant's report
Manila, SMEDSEP
White, S. and J. Chacaltana (2002) Enabling small enterprise development through a better
business environment. Donor experiences in supporting reforms in the business
environment. Washington, Committee of Donor Agencies for Small Enterprise
Development, Working Group on Enabling Environment.
World Bank (2003) Investment Climate Survey Online, World Bank. 2005.
http://iresearch.worldbank.org/ics/jsp/index.jsp
World Bank (2004) Doing business in 2005; removing obstacles to growth. Washington DC,
World Bank, International Finance Corporation and Oxford University Press.
SMEDSEP (GTZ) case study
41
Improving the business environment in the Philippines
Annex 1: City competitiveness indicators
The following qualitative (ql) and quantitative (qn) indicators were used to assess
metropolitan cities (i.e., Metro Manila, Metro Cebu and Metro Davao), mid-sized cities
(those non-metropolitan cities with more than 200,000 residents), and small cities (cities with
less then 200,000 residents) (AIM Policy Center 2003).
COST OF DOING BUSINESS (6 Indicators)
1 (ql)
In general, profitability of doing business in this city is very high
2 (ql)
Informal fees (bribes) in the city are non-existent
3 (qn)
Cost of power for industrial use
4 (qn)
Average rent of commercial space
5 (qn)
Average installation cost of new telephone lines
6 (qn)
Local minimum wage
DYNAMISM OF LOCAL ECONOMY (10 Indicators)
7 (ql)
In the next six months, the revenues in the city are likely increase considerably
8 (ql)
In general, the city's regulatory environment (such as licensing procedures and
fees, taxes, and other regulatory requirements) is conducive to business
9 (ql)
Tourism as an industry is a very vibrant sector
10 (ql)
In my city, access to financing for private businesses is readily available
11 (qn)
Average household income
12 (qn)
Local inflation rate
13 (qn)
Percentage of top 200 companies in city
14 (qn)
Population vs. fast-food chain locators
15 (qn)
Market size
16 (qn)
Consumer Price Index
LINKAGES AND ACCESSIBILITY (6 Indicators)
17 (ql)
Raw materials and other production inputs are located near the city
18 (ql)
The transportation system for moving raw materials from domestic sources to the
city and finished goods to other domestic markets works very well
SMEDSEP (GTZ) case study
42
Improving the business environment in the Philippines
19 (ql)
International entry and exit points such as airports, seaports, and other transshipment points are located near the city
20 (ql)
In my city, the availability of support services, such as advice on product or
process development, marketing, and business strategy making, is readily
available
21 (ql)
The benefits of collaborating with other firms in my industry are very positive
22 (ql)
The level of services provided by national agencies (e.g., DENR, BFAR, BFAD)
is very good
HUMAN RESOURCE AND TRAINING (15 Indicators)
23 (ql)
Skilled labour needed by my company is available in the city
24 (ql)
Workers from the local pool are eager to developing skills
25 (ql)
Curricula and academic programs in local colleges, universities and other tertiarylevel training institutions equip graduates with basic skills needed by local
industries
26 (ql)
IT training programs available in the city equip students with needed IT skills
27 (ql)
Investing in training and skills development is very important
28 (ql)
In my city, training programs jointly organized by schools and industry partners
are highly present
29 (ql)
My business allows on-the-job trainees from schools
30 (ql)
Good performance by workers is expected
31 (ql)
Effective management of my firm's human resource is the least of my worries
32 (ql)
In my city, relations between management and labor are generally constructive
33 (ql)
The link between the job satisfaction of my workers and productivity very strong
34 (ql)
Worker suggestions about ways to improve business operations are encouraged
35 (ql)
In my city, poor labour practices such as discrimination and harassment are
discouraged
36 (qn)
Number of tertiary educational institutions
37 (qn)
Number of Vocational Institutions
INFRASTRUCTURE (12 Indicators)
38 (ql)
The city's roads/road network and traffic management are well managed
39 (ql)
During peak hours, roads are always clear
SMEDSEP (GTZ) case study
43
Improving the business environment in the Philippines
40 (ql)
Electric power in the city is reliable
41 (ql)
The water supply in my city is abundant
42 (ql)
Connecting to telephone lines from other service providers is easy
43 (ql)
Cellular phone signals in the city are always adequate
44 (ql)
Internet Service Providers (ISPs) are reliable
45 (ql)
The city's waste management program works very well
46 (qn)
Number of banks
47 (qn)
Road Density
48 (qn)
Vehicle density
49 (qn)
Number of ISP providers in the city
RESPONSIVENESS OF LGU (12 Indicators)
50 (ql)
Securing a business permit is simple and efficient
51 (ql)
The city government is honest and transparent in its dealings
52 (ql)
The city's administration of justice is fair
53 (ql)
Policies and regulation in the city are reflective of business needs
54 (ql)
The local government holds regular forums to elicit opinions of its constituents
55 (ql)
The city government's Clean and Green Program has been very effective
56 (ql)
Business taxes imposed by the city are reasonable
57 (ql)
The city's master development plan is appropriate to business sectors' needs
58 (ql)
Land-use regulations, such as zoning, are reasonable and flexible
59 (ql)
Local government units are involved in developing human resources dynamically
60 (ql)
Local government programs to assist displaced workers are effective
61 (qn)
Percentage of IRA to total LGU revenue
QUALITY OF LIFE (9 Indicators)
62 (ql)
The city, especially its roads and public open spaces, is always clean
63 (ql)
Open bodies of water in the city are clean
64 (ql)
Air quality in the city is clean
65 (ql)
The city's rest and recreational facilities (i.e., cinemas, bookstores, malls, etc.) are
adequate
SMEDSEP (GTZ) case study
44
Improving the business environment in the Philippines
66 (ql)
The security environment is conducive for business
67 (qn)
Incidence of theft per 100,000 Population
68 (qn)
Incidence of murder per 100,000 Population
69 (qn)
Life expectancy at birth
70 (qn)
Hospital beds per 100,000 population
SMEDSEP (GTZ) case study
45
Improving the business environment in the Philippines
Annex 2: Philippine development partner organizations
The following organizations have participated in development cooperation programs with the
Government of Germany:
Bureau of Internal Revenues (BIR)
Business associations
Department of Environment and Natural Resources (DENR)
Department of Labor and Employment (DOLE)
Department of Trade and Industry (DTI)
Development Bank of the Philippines (DBP)
Land Bank of the Philippines (LBP)
Local government units (LGUs)
National Economic and Development Authority (NEDA)
Non-governmental organizations (NGOs)
Technical Education and Skills Development Authority (TESDA)
SMEDSEP (GTZ) case study
46
Improving the business environment in the Philippines
Annex 3:
Partner organizations in German development cooperation
Federal Ministry for Economic Cooperation and Development (BMZ): responsible for
the planning and implementation of the German Government´s development policy. It
monitors the useful and efficient spending of public funds by the partner organizations.
German Development Service (DED): the development service arm of the Federal Republic
of Germany specializing in personnel cooperation. DED program areas are: Sustainable land
use and resource management; Integrated coastal zone management; Vocational trainig and
support for small and medium enterprises; Civil conflict transformation; Promotion of local
organization and self-help initiatives.
Gesellschaft für Technische Zusammenarbeit (GTZ): supports development projects and
programs and cooperates with various partners, such as local organizations, NGOs, the
private sector as well as other German development organizations and multilateral donors.
All projects pursue the overarching goal of reducing poverty, a fundamental principle of
German development policy.
Capacity Building International (InWent): an organization for international human
development, advanced training and dialogue. InWent is promoting sustainable social,
economic and ecological development through international exchange and training.
KfW Development Bank: Germany´s leading bank in the rehabilitation of economies. It
plays an active role in the business areas of investment finance, export and project finance. It
also supports development cooperation through financial cooperation with developing
countries combined with advisory and other technical services.
Center for International Migration and Development (CIM): CIM has recruited German
and European experts for know-how transfer and capacity-building programs for partner
organizations in Africa, Asia, Latin America and Eastern Europe.
Friedrich Ebert Stiftung (FES): a non-profit, private educational foundation committed to
the basic values of social democracy. Its Philippine projects cover crosscutting themes of
political and economic reforms, social change, poverty reduction, gender issues, youth,
human and workers´ rights, democratic participation and international cooperation.
SMEDSEP (GTZ) case study
47
Improving the business environment in the Philippines
Konrad-Adenauer-Stiftung: makes an active and substantial contribution to international
cooperation and understanding. KAS is cooperating with six partners in the area of political
education, local government, rural development, as well as the media.
Hanns Seidel Foundation: active in the Philippines since 1979, extending development
assistance mainly in the field of human resource development ranging from training and
education, research and publications to project development and consultancy services.
Friedrich Naumann Stiftung: the German Foundation for the promotion of liberal politics
through civic education, international political dialogue and political consultancy.
SMEDSEP (GTZ) case study
48
Improving the business environment in the Philippines
Annex 4:
Other donor support for private sector and small enterprise
development
There are a number of other donor agencies working in the field of private sector and small
enterprise development in the Philippines. This includes the following:
Asian Development Bank (ADB)
The ABD Country Assistance Plan for the Philippines includes a focus on private sector
development and recognises the ‘basic prerequisites for the efficient functioning of the
private sector are the development of the capital market and financial infrastructure;
deregulation of industry, trade, and investment; and adoption of appropriate policies
conducive to efficient market functioning (Asian Development Bank 2005). However,
emphasis is given to financial assistance and advisory services to catalyse the privatisation of
selected state-owned enterprises as well as the provision of infrastructure.
ADB supports private sector development by:
•
Increasing the private sector’s participation and competitiveness
•
Improving the policy environment in which the private sector operates
•
Enhancing infrastructure support
Also continues to promote development of Small and Medium Enterprises (SMEs) as part of
its private sector strategy (Alburo, Lamberte et al. 2003).
Canadian International Development Agency (CIDA)
Helps in building private sector capacity to create jobs, primarily by small and medium
enterprises and cooperatives (Alburo, Lamberte et al. 2003).
In 1994-2000, CIDA funded a number of studies on various issues done under Entrepreneur
Support Program and Entrepreneur Linkages Project.
In 1999-2004, CIDA undertook established a Policy Training and Technical Assistance
Facility to provide technical assistance and training to national agencies on sub-project basis.
In 2004-2009, CIDA established a WTO Implementation Support/APEC project to enhance
compliance with WTO obligations and/or WTO accession requirements of six Southeast
Asian nations and to increase the ability of the nations to take advantage of their WTO rights.
European Community
Promotes trade and investment of Filipino/European businessmen/companies (Alburo,
Lamberte et al. 2003).
SMEDSEP (GTZ) case study
49
Improving the business environment in the Philippines
Japan International Cooperation Agency (JICA)
In 2002, JICA placed an expert on SME promotion and development in DTI with the aim of
helping the department create a favourable policy environment and a well-coordinated
institutional set-up for the promotion and development of SMEs in the Philippines.
In 2002-2004, JICA supported the design of the Philippine Small and Medium Scale
Enterprises Development Plan to hasten the growth of SMEs. This included a development
study to assess the conditions of local small and medium scale enterprises, identify
competitive advantage of the priority sector, and revalidate current SMEs policies, strategies
and programs.
In 1999-2003, JICA supported a Project for Modernization of Industrial Property
Administration. This technical cooperation sought to make IPO’s able to grant industrial
property rights more promptly with increased accuracy.
In 1989, JICA placed an advisor in the Foreign Desk Officer of the Board of Investment to
promote the entry of Japanese investment to the Philippines and to formulate and recommend
to Philippine Government authorities, measures and action programs for the promotion of
foreign as well as local investments in the Philippines.
USAID
Helps in improving competition policies in infrastructure; supports SME development
(Alburo, Lamberte et al. 2003).
World Bank
Helps in strengthening the business environment, improving domestic mobilization of longterm resources and, improving the infrastructure; supports SME infrastructure needs (Alburo,
Lamberte et al. 2003).
Other German development partners
SMEDSEP recognises the role of other German development partners in the field of SME
development and will expand its cooperation with these agencies. This includes cooperation
with the Centrum für internationale Migration und Entwicklung (CIM), German
Development Service (DED), Internationale Weiterbildung und Entwicklung (InWEnt), and
the Kreditanstalt für Wiederaufbau (KfW, German Financial Cooperation); KfW provides
financing for micro, small and medium enterprises.
SMEDSEP (GTZ) case study
50